Spain is now closer to occupying its rightful place among countries with a firm commitment to innovation in financial services. The Ministry of Economy and Enterprise has just published the Draft Bill for the digital transformation of the financial system, which introduces the concept of a regulatory sandbox or controlled testing environment for technology-based financial innovations.
Implementing a national sandbox is only fair. Spain, which possesses such technologically advanced banking, needed to claim its space in the select and well-known group of Hotspots or innovative countries with high Fintech development. The United States, Singapore, Israel, Hong Kong, the United Kingdom, and the Netherlands are already members of this VIP club. The draft bill published last week reflects the clear will of the authorities for this to be the case. The welcome is unanimous and unreserved across the entire financial services provider community.
Establishing an appropriate legal framework of measures that facilitates and supports the private sector’s innovation process is not simple and, normally, requires resources and capabilities that exceed the primary objectives of regulatory and supervisory authorities. Furthermore, the more regulated a sector is, as is the case with the financial industry, the more rigid the regulatory framework becomes and, therefore, the more complex it is to be disruptive and innovative without assuming high risks to security, client protection, or financial stability.
A regulatory sandbox can be the ideal formula to overcome these barriers and allow innovation to find a place and permeate all market participants, including the authorities themselves. It involves creating a controlled testing laboratory—limited in both time and sample size—and exhaustively supervised, where innovative projects can be accommodated to help improve the quality and availability of financial services, increase the efficiency of entities or markets, or help improve regulation or supervision. In short, it must be a tool that facilitates innovation and also enables learning about the effects and impact of new technologies on business.
During recent months, the Spanish Banking Association had warned of the need for this testing space, and that its design should be ambitious and involve all relevant authorities with jurisdiction over various matters. The published text contains positive elements and is sensitive to many of the aspects we raised.
Firstly, it is a laboratory open to any natural or legal person, including financial firms, technology-based companies, and public or private research centers, as well as the competent authorities themselves, who can use the sandbox to test “projects of general interest.”
On the other hand, there is a single entry mechanism to the sandbox through the General Secretariat of the Treasury and International Financing, although the tests will be supervised by the various authorities responsible for each project according to their area of competence. That is to say, although the architecture is designed for a single laboratory, it has the necessary involvement of relevant authorities to accommodate a wide range of project types. Furthermore, the necessary mechanisms are created to promote collaboration and coordination among all authorities through the Testing Commission, which is highly relevant for learning and subsequent decision-making after examining the test results.
Inevitably, the draft bill includes the necessary safeguards to ensure experimentation is safe—guarantees regarding damages and confidentiality for participants—as well as the possible interruption of a project in the event of a breach of the regulation in question, the agreed conditions, or a potential risk to financial stability, market integrity, or customer protection. It could not be otherwise if we want the sandbox to function properly.
There are, however, other elements that raise certain questions regarding their practical application, most of them linked to the exit regime from the tests and subsequent measures. We appreciate the unique opportunity to participate in the Ministry of Economy’s consultation to clear up our doubts, contribute to refining the proposed framework and, in general, help ensure the sandbox becomes a reality as soon as possible.
Lorena Mullor, Advisor to the Spanish Banking Association
